XL’s 1Q20 core net profit of IDR58bn (-73% QoQ, -16% YoY) came in below expectations due to higher-than-expected D&A and interest expense. Despite the subs attrition, sequential revenue improvement was driven by higher ARPU on the back of better data monetization. Data growth remains solid supported by network quality and smartphone adoption. FY20 guidance is withdrawn while capex plan remains unchanged. Reiterate HOLD on Axiata with TP of RM4.56.

Below expectations. XL’s (66.4% subsidiary of Axiata) 1Q20 core net profit of IDR58bn (-73% QoQ, -16% YoY) was a disappointment, accounting only for 6% of consensus’ full year estimate. This underperformance was attributable to higher-than expected D&A and interest expense. 1Q20 one-off items include forex gain (IDR33bn) and PPE disposal gain (IDR1.4tr).

QoQ. Turnover gained 1% to IDR6.5tr supported by the 2% increase in data revenue, more than sufficient to offset the declines in non-data and other revenues. Data accounted for 91% of 1Q20 service revenue. Reported EBITDA was higher by 22% to IDR3.2tr solely due to IFRS 16 adoption which artificially lowered infrastructure cost by 24%. Comparing on pre-IFRS basis, 1Q20 EBITDA of IDR2.7tr indicated an uptick of 3%. Stripping off the huge one-off tower disposal gain, core net profit plummeted by 73% attributable to the higher D&A and interest expense.

YoY. Top line grew 9% supported by service revenue which expanded by 11%. Data was the main revenue driver with 17% gain while traditional services were still in declines. Reported EBITDA surged by 40% and IFRS -adjusted EBITDA rose 17% thanks to lower marketing (-1%), interconnect and other direct expenses (-9%). Yet, bottom line shrunk by 16% on the back of higher D&A.

Subscriber. Total base contracted by 1.2m (or +2%) QoQ to 55.5m subs, which gave back 4Q19’s net add, as a result of increased competition. Postpaid remained on positive trajectory with 80k additions QoQ while prepaid lost 1.3m subs. Prepaid ARPU was flat QoQ at IDR34k while postpaid’s strengthened by 5% QoQ (or IDR5k) to IDR114k. With the improved coverage and more affordable device bundle offerings, 86% of total base or 48m are smartphone users generating 1,000PB of total traffic in 1Q20, up 41% YoY.

Expansion. Continued to invest to provide high quality internet services, especially ex-Java, by adding 3G and 4G nodes by 2k and 10.5k YoY, respectively in 1Q20. This brings total base stations to circa 134k. LTE is now available in 449 cities and areas across Indonesia with circa 44k eNodeB. XL Axiata also continues to invest in fiberizing its network to handle rising data traffic.

Covid-19 impact. With the partial lockdown, some outlet closures are expected to impact on subscriber acquisition. The economic impact has also led to lower spending on telco. With more homebound, XL experience significant pickup in home fibre demand and current penetration rate at 20%.

FY20 guidance withdrawn. However, capex of circa IDR7.5tr is unchanged. XL will only shift between capacity and coverage rollouts due to subscriber movements.

Forecast. Maintain forecast pending analyst briefing in conjunction with Axiata’s 1Q20 results announcement slated on 21 May. Axiata remains a HOLD on the back of unchanged SOP -derived TP of RM4.56 (see Figure #1). We like Axiata’s regional exposures with focus on emerging countries which may deliver great growth potentials. However, regulatory and execution risks are major concerns. Asset monetization through tower listing is a catalyst.

Source: Hong Leong Investment Bank Research - 12 May 2020